Analytical Methods and Approaches for Water Resources Project Planning (2004) / Chapter Skim
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3 Assessing Benefits and Costs of Corps Projects
3 Assessing Benefits and Costs of Corps Projects
Pages 38-72
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From page 38... ...
Examples of key subsequent federal and Corps water resources planning guidance documents regarding benefit and cost calculations include a 1952 document (Circular A-47) from the 38
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From page 39... ...
. Although the methods and criteria for evaluating benefits and costs in Corps studies have changed substantially over the years, BCA has played a central role in prioritizing water project proposals throughout the agency's history and remains the key decision criterion in Corps planning studies.
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From page 40... ...
identifying all alternatives for which the benefits exceed the costs. A strict decision rule based solely upon BCA, however, is problematic because the multiple objectives of government agencies like the Corps are not easily reduced to simple criteria.
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From page 41... ...
This includes both direct financial costs and indirect benefits forgone associated with a project. For example, the full opportunity cost of a project might include construction costs, administrative costs, the value of lost environmental benefits, and the economic value of discomfort or inconvenience suffered as a consequence, such as waterway traffic delays during construction.
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From page 42... ...
should be addressed and reported. By providing this information, not only the final users of BCA will know the best estimates of the net benefits of the project, but they also will have a good understanding of who pays for it and who benefits from it.
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From page 43... ...
Pursuant to the 1936 Flood Control Act, however, the Corps is required to use benefit-cost analysis as a strict decision rule in recommending projects to Congress. This reflects a view that BCA assessment is a specific, strict decision rule, which is inconsistent with principles of "best practice" in modern economics and inconsistent with the principles identified by the Arrow et al.
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From page 44... ...
The unifying theme of revealed preferences is that data on market behavior are used to calculate the value of associated environmental goods. Stated preferences are methods that elicit WTP directly from individuals through surveys, interviews, or simulated exercises.
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From page 45... ...
are mandated to address environmental issues and problems; their experience with valuation is thus relevant to the Corps' ecosystem restoration efforts. In 2000, the EPA issued Guidelines for Preparing Economic Analyses, which serves to guide BCA applications for EPA's environmental regulations and programs (similar to the Corps Planning Guidance Notebook)
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From page 46... ...
Carefully used, these techniques can improve the Corps' planning and evaluation capabilities. The Corps Institute for Water Resources has led agency efforts in supplementing its guidance in this analytical realm (Stakhiv et al., 2003)
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From page 47... ...
The Bank's appraisals distinguish "financial" costs and benefits -- those that accrue as cash flows to or from the project sponsor -- from "economic" costs and benefits that are experienced by all other entities. BCA is accepted within the Bank not only as a systematic way to evaluate proposed investments, but also as a decision criterion, and over the years, Bank economists have made important contributions to the literature on benefit-cost analysis.
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From page 48... ...
The Office of Management and Budget should support such cooperative efforts. STATE OF CORPS PRACTICE: CURRENT ECONOMICS APPROACHES The Corps Planning Guidance Notebook (USACE, 2000; see Box 33)
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From page 49... ...
The project aimed primarily to protect floodplain structures and inhabitants by raising levees, clearly part of the Corps' mission to mitigate flood damages. Beyond simply raising a levee, the design ultimately included decorative stone facades, walking and bicycle paths, public gathering areas, and decorative lighting and ironwork (USACE, 1981)
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From page 50... ...
d. Net benefits (optimization)
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From page 51... ...
l. Environmental and social impact assessment -- Consider a full range of social and economic effects as required in applicable federal laws such as the National Environmental Policy Act, Clean Water Act, Rivers and Harbors Acts, and Flood Control Act.
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From page 52... ...
The Planning Guidance Notebook should be revised to incorporate these types of more explicit provisions about the spatial and distributional dimensions of costs and benefits. CORPS MISSIONS AND METHODS Although the PGN's principles of analysis are not very controversial, their application to individual projects requires interpretation.
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From page 53... ...
They must participate in and share the costs of planning studies, but they often do not understand the principles that guide Corps planning and the specific rules that limit the flexibility in some areas. It is typically easier to follow established procedures than to exercise independent judgment, but some degree of judgment is required and often desirable in many aspects of water resources planning; each water project and planning study is different and will not conform to all general planning criteria.
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From page 54... ...
vested in an alarmingly small number of people within Civil Works." The task force recommended several actions to "hire-train-retain" planners, and proposed an education program that would require new planners to participate in a series of workshops and offer them opportunities to enroll in other seminars, workshops, and courses. As a result of the task force recommendations, the Corps initiated a "core curriculum" of basic planning workshops, established a six-month planning associates program in advanced planning skills for mid-career planners, and is embarking on a cooperative program with several universities -- Arizona, Florida, Harvard, Johns Hopkins, Southern Illinois, and Washington State -- to offer interdisciplinary water resources planning master's degrees to Corps employees.
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From page 55... ...
Structural and nonstructural flood control projects will affect these categories in different ways, as nonstructural flood damage reduction projects often seek to simultaneously reduce flood damages and enhance environmental benefits. If these environmental benefits are not considered, however, there may be an analytical disincentive against these types of project.
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From page 56... ...
be included in the benefit-cost analysis of all flood damage reduction projects -- including all nonstructural projects .
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From page 57... ...
has concluded that people systematically underestimate the risks of flooding. As far back as 1970, the Corps had formed an ad hoc group of staff members to meet periodically to discuss nonstructural approaches to flood damage reduction (in 1985 this group was formally chartered as the National Floodproofing Committee)
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From page 58... ...
The reasons the Corps has not had a more vigorous nonstructural flood damage reduction program are complex, as noted in the NRC (1999a) report: There appears to be a large and increasing demand for Corps-sponsored nonstructural flood damage pro jects .
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From page 59... ...
Among its various flood-related activities (which include oversight of the National Flood Insurance Program) , FEMA provides guidance on benefit-cost calculations to help determine the cost-effectiveness of flood damage mitigation projects (http://www.fema.gov/fima/hmgp/riverine_a.shtm; accessed January 24, 2004)
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From page 60... ...
Past studies have shown that the benefit calculation procedures used by the Corps in its flood damage reduction projects-especially nonstructural projects -- do not consistently capture the full range of benefits. These limitations may be discouraging the agency from greater involvement in these types of projects.
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From page 61... ...
During the 1990s, to help incorporate environmental benefits into the Corps planning framework, the Corps and its Institute for Water Resources sponsored and conducted several studies regarding the accounting of environmental benefits (e.g., Apogee Research Inc., 1996; IWR, 1996, 1997; Martin and Stakhiv, 1999; Shabman, 1993)
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From page 62... ...
. The field of ecosystem restoration is supported by an increasingly rich theoretical base, but there has been limited experience and limited evaluation of results to date.
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From page 63... ...
Valuation Techniques As subjects for economic analysis, ecological restoration projects share some similarities with other Corps projects, as they entail an initial investment, various subsequent expenditures, and a stream of benefits valued by humans. Some characteristics common to most ecological restorations, however, should be stressed lest they be
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From page 64... ...
Constructed to enhance Missouri River navigation and reduce flood damage, the dams have also altered the dynamics of the river's hydrologic and geomorphic systems, which has contributed to the declining condition of the river-floodplain ecosystem. The Corps' main document guiding system operations is the Missouri River Mainstem System Reservoir System Regulation Manual, or the "Master Manual" (USACE, 1979)
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From page 65... ...
For example, a restored wetland can simultaneously reduce downstream flooding, trap sediment, purify water, produce hunting and fishing opportunities, provide attractive scenery, and support endangered species. Most, although not all, of these benefits are nonmarket benefits, so their value must be calculated by revealed or stated preferences, rather than by market prices.
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From page 66... ...
E-154) states that "ecosystem restoration outputs are not discounted, but should be computed on an average annual basis, taking into consideration that the outputs achieved are likely to vary over time."13 Temporal considerations are relevant to all productive resources, however, whether the services yielded can be monetized by standard means (e.g., flood damage reductions)
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From page 67... ...
. According to the policy declaration, The Corps Institute for Water Resources will validate Corps economic forecasting models through an independent expert review process.
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From page 68... ...
Increased participation of external experts may also help the Corps contend with a longterm decline in the size of its planning staff that is likely to be compounded by impending retirements. Finally, systematic peer review of Corps planning studies would help ensure that the methods used represent best practices, that assumptions are reasonable and justifiable, and
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From page 69... ...
This reasonable policy should be applied more generally to Corps planning studies. Reporting Results of Economic Analyses Analytical results should be understandable to reviewers, to stakeholder groups, and to policy makers.
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From page 70... ...
A review of the treatment of economics in Corps planning is thus in a sense a review of the agency's decision-making paradigms. Although economic concepts such as benefits and costs are clearly important in water resources management decisions, there is a danger in relying too heavily on monetized values and analytical methods to arrive at a final decision.
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From page 71... ...
. A review of economics methods in the Corps' primary planning guidance shows that these are not fully consistent with procedures used by other federal agencies and organizations.
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From page 72... ...
Periodic, independent review can help ensure that these human tendencies are not affecting a study's engineering, economic, and scientific analyses. In addition to weighing the input of independent experts, the Corps has for many years sought the advice of interested organizations and individuals in its planning studies and projects.
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